Macquarie Research comments on the uranium sectorAccording to Macquarie Research:
Uranium
Quite simply, awful
The uranium market has, quite simply, been an unmitigated disaster in 2014. The spot price has declined 16% since the start of the year and at $29/lb, it is currently at its lowest level since mid-2005. This decline has been counter to even the most bearish of forecasts, such as ours, and indicates the need for more supply curtailments in an environment where demand remains sluggish. We recently downgraded our 2014-2016 full-year U3O8 price forecasts by more than 10%.
On the supply side, there have not been any announced production cutbacks since Paladin’s Kayaklera mine (~1,100tU pa.) was put on care and maintenance in February. Previously we had seen Uranium One, ARMZ, Kazatomprom, and small-scale US producers announce mine idling, capacity reduction and/or the postponement of expansion plans. The lack of further cutbacks has almost certainly weighed on the market.
Although we are trading deep into the cost curve (~50th percentile), mitigation continues to be provided by contract selling (Fig 171). As Cameco, the world’s largest listed uranium miner recently stated in its 1Q results call, half of its deliveries in 2014 are based on market-related contract and the bulk of those contracts have price floors around current market levels. These structures are keeping miners going and are acting to further delay rebalancing. Secondary supply, which constitutes around 20% of total market supply, has also remained strong despite the end of the Russia-US HEU deal last year, with enricher underfeeding and Russian tails re-enrichment key contributors.
Meanwhile, demand side conditions remain sluggish. Following almost no growth in 2013, a stronger increase in reactor requirements is expected this year. However, inventories globally are significant and contract coverage is high. This means that the need for consumers to dip into the spot market is unlikely to see a significant upturn any time soon. As highlighted in our recent note, inventories at the world’s largest consumer, the US (25-30% share), ended 2013 at all-time highs of 2.6 years worth of current consumption.
Japan remains a key-talking point, with varying degrees of excitement with regard to reactor restarts impacting the uranium equities YTD. Our Japanese equities analyst, Polina Diyachkina, seeing as much as 9.2GW of capacity (11 reactors) being restarted in 2014, though recent uranium industry surveys indicate that expectations are skewed towards there being further delays in the restart process. In any case, while imperative for long-term market prospects, in the short-term this is overwhelmingly just a sentiment impact. Even in a best case scenario, we don’t think Japanese utilities would need extra pounds above those stockpiled or contracted until the back end of this decade.
China remains a key bright spot on the demand-side, with 3 new reactors (3.2GW) starting-up already this year. But China’s aggressive buying of uranium concentrate since 2010 means that it too has more than enough supply to cater to this increased demand. We estimate that Chinese stocks entering 2014 were close to 59,000tU or around 8 years worth of current consumption. There are no signs that this inventory build will slow, with China continuing to mopping up cheap surplus material on the spot market, for future consumption. In terms of the uranium price, we think a more substantial recovery will have to wait until 2016 at the earliest, once demand has had sufficient opportunity to bring down the global surplus and inventories to a level where non-Chinese participants need to rely more on the spot market.